Matrix Blog

Source: RedKid

Just when I was able to cite “OFHEO” and Office of Federal Housing Enterprise Oversight (who comes up with these names?) from memory, along comes a new agency created from the Housing and Economic Recovery Act of 2008 recently passed into law.

FHFA: Federal Housing Finance Agency. No web site yet – I tried www.fhfa.gov

It has to compete with a bunch of others organizations that use the same acronym:

FHFA Fairfax Hispanic Firefighters Association (Virginia)
FHFA Fairly Homogeneous Farming Area
FHFA Family Health Foundation of America
FHFA Federal Housing Finance Agency
FHFA Florida Health Freedom Action (South Miami, FL)
FHFA Florida Home Furnishings Association
FHFA Florida Housing Finance Agency
FHFA Foot Health Foundation of America

I am hopeful the new agency will be better suited to provide better oversight than OFHEO did. OFHEO was essentially a rubber stamp for the GSEs until a few years ago when the FNMA accounting scandal woke it up. A new director took the reigns at OFHEO, James Lockhart, who seems to be doing all the right things (and one heck of a lot of press releases).

From the latest press release, it looks like the current director of OFHEO had a big hand in creating the new agency, FHFA. Since Lockhart has been pretty coherent, I’ll try to consider this as a good thing.

No web site, no information on the structure. Nothing but a press release so far. We’ll have to wait. Of course, credit and liquidity are very limited and need to be fixed before housing takes a turn for the positive, so I hope its not too long.

Takeaway: Odds are government will move too slow to provide meaningful solutions to the credit crunch in a world that moves much faster. In fact, the lack of action over the past several years set the stage for the condition we are currently in so I am not sure what we are waiting for.

By the way, freecreditreport.com …isn’t.

Tags: FHFA, GSE, OFHEO

2 Comments

I have been knocking around the concept of whether the GSEs should be become government agencies. It’s a strange predicament for the taxpayer, because of the implied guaranty that was bestowed on the GSEs by the federal government (strangely, to make President Johnson’s Vietnam War budget look more palatable).

That long debated guaranty was made tangible this past week with the housing bill that just passed both sides of Congress. The federal government, since the late 1960s, finally showed the public that the GSEs are too big to fail.

There was an ongoing concern that the GSEs were getting too big…

The dilemma for me is the fact that the taxpayers bailed out the GSEs. It could cost nothing, or as much as much as several 100 billion dollars, depending on how the economy and the housing market holds up.

This liability to the taxpayer is a significant financial benefit to the shareholders of GSE stock, perhaps bolstering their share price above where it may have fallen. Take on liability without future reward.

Of course it is also of significant benefit to the taxpayer to keep a key component of the housing market afloat, a lynchpin of our economy.

A short essay by Alice Rivlin of the Brookings Institution, covers this territory in: Do We Want Fannie Mae Public or Private?.

My cynical laissez-faire side says that government could not have managed this situation any better than the private sector did and vice versa. Look at how HUD has played a nominal role in solving this problem. Private sector innovation with actual, real, engaging, competent, regulatory oversight.

Not just government oversight…

Indivuduals need to reconsider placing themselves in harm’s way, financially.

Last week’s Op-Ed article by David Brook’s The Culture of Debt suggests that:

People don’t change when they see the light. They change when they feel the heat.

That Op-Ed piece inspired an hilarious response from a reader (hilarious to me, anyway):

Mr. Brooks does not mention one important reason societies develop good habits or bad ones: Our leaders can have transformative impact.

Franklin D. Roosevelt calmed us down. John F. Kennedy got us to volunteer. Ronald Reagan made us less dependent on government. George W. Bush could have asked us to sacrifice. He didn’t. His post-9/11 advice was to go shopping. Obviously, too many of us did just that.

Tags: Fannie Mae, GSE

2 Comments

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.

Tags: Dan Gross, FHA, Fannie Mae, GSE, OFHEO, Bankrate.com, Bailout Nation, Freddie Mac

2 Comments

Here’s a collection of phrases that caught my eye for our newfound understanding about our new housing/credit morality/thinking:

Moral Hazard – I have linked to Holden Lewis’ brilliant post before: Moral hazard is when people take unwise risks because they are sheltered from the consequences. For example, if you wear a seat belt and drive a car with airbags, you’re more likely to tailgate.

Rally between Concern Phase and Fear & Capitulation Stage – Comstock Partners has some great commentary about the housing market: Now even Fed Chairman Bernanke has caught on to the dangers of the bursting of the bubble.  He stated in both Tuesday’s and Wednesday’s testimony before Congress, “the housing market is the central element of the financial crisis.  Anything we and Congress can do to strengthen the housing market, or strengthen the mortgage financing market, will be helpful.  We can do this by restoring confidence in the Government Sponsored Enterprises (GSEs).”  We are happy to have Mr. Bernanke on board, but are not too happy about begging Congress to slow down the process by trying to get bills passed that would postpone the inevitable decline and make the eventual decline even worse. We have to let the free market work its way through the housing crises.

Flat is the new up – Daniel Gross of Slate’s column captures the feeling of victory in today’s economy. Last weekend, at a suburban barbecue, I asked a friend who works for an asset-management company how his firm was faring in these turbulent times. “We’re actually doing OK. Keeping our heads above water.” At which point another guest chimed in: “Hey. Flat’s the new up.”

Nexus between fear and greed – I wrote about this one before.

Foreclosure Contagion – Zubin Jelveh’s Odd Numbers blog in Portfolio.com offers a wealth of sharp insight on an array of economic topics: The researchers also find that the negative hit from a foreclosure is strongest right before a lender takes control of the property. They argue “that when foreclosure is inevitable, efforts to speed the foreclosure process would be effective at reducing the contagion effect.”

It’s a good time to buy real estate – housing prices double every ten years – NAR is hard selling and yes, it may be a good time to be real estate in certain markets and for some people. Because NAR says this 24/7, it’s hard not to cast a jaded glance their way.

Tags: Dan Gross, CNBC, GSE, Bankrate.com, Ben Bernanke

Comments Off on Catch Phrases That Capture Our Housing Hindsight Morality

Dustin Luther, the godfather of the real estate blogosphere with his famed Rain City Guide blog on the Seattle market has an insightful new blog called 4Realz.net. He invited me to participate with Rhonda Porter and Jessie Beaudoin, two very sharp real estate experts.

4realz Roundtable: How Appraisal Rule Changes will Affect Real Estate Professionals

This conversation is referring to the Cuomo/Fannie agreement.

Of course I couldn’t figure out how to log in right away so I am a few minutes late for the show.

Check out the discussion

Thanks again Dustin – see you in San Fran!

Tags: GSE, Television

2 Comments

Real estate -> territorial -> turf -> self-preservation -> wide knobby bike tires

Ok, so the timeline doesn’t work, but hear me out. I used to fix my own flat tires, now I rely on the bike shop so I don’t have to get dirty.

As I have mentioned on more than one occasion, government on a federal level seems unable to ease the credit/housing market pain. Congress can’t seem to move forward with housing relief in any meaningful way. The Federal Reserve missed the signs of growing housing stress and took action too little too late. The GSEs seemed to be part of the problem as enablers of poor lending practices (made painfully apparent with its agreement with NY AG Cuomo).

GSEs Fannie Mae, Freddie Mac, plus FHA were designated as the housing saviors for Congress to rely on in the stimulous package. They’ve lost more than $15B in the past 6 months by my calculations and everyone is rooting for them.

On a monday, a comment by a Federal Reserve official and a Lehman analyst sent GSE stocks plummeting, an illustrating just how nervous investors are about the effectiveness of the GSEs role in all of this is.

Aside from letting time pass, I am fresh out of ideas, and I have resorted to incessant whining so watch out.

The problem is more complex than Congress can wrangle an effective compromise out of, and the OTS is still angry about the Cuomo deal with the GSEs.

It seems like a government solution’s time has passed.

On the bright side, the Tour de France, my all time favorite sporting event after March Madness, might have a prayer of being drug free this year or close to it. Of course, like housing, there is a turf war between the Tour de France and the International Cycling Union over their more stringent testing policy. Coincidentally, none of the usual cycling stars are in the race.

Perhaps an unknown, generic solution to housing may appear at some point. The current situation is over the heads (and handlebars (sorry)) of the usual government participants until they can get together.

UPDATE: Fed to Clamp Down on Exotic and Subprime Loans [NYT]

UPDATE2: Mortgage Fears Send Global Shares Down [NYT]

Tags: FHA, GSE, Sub-Prime, Lehman

Comments Off on [GSE Flat] Reality Sets In For Those Wide Knobby Tires

Pirates of several hundred years ago have been getting a lot of attention of late via the 3 Johnny Depp/Disney movies.

Well, apparently pirates formed some of the first petri dishes of modern economics and democracy according to a new book “The Invisible Hook: The Hidden Economics of Pirates” written by an economics professor at George Mason (hat tip to Freakonomics).

The book caught me eye, arrgh, as someone who fancies the likes of (sorry, I digress) Talk Like A Pirate Day each September 19th as well as my friend Chris Miles’ site TalkLikeAPirateDay.com. The “founders of International Talk Like a Pirate Day acknowledge that there is, in people who love to say “Aargh,” a yearning for a certain kind of freedom.”

Aargh!

Presidential candidates, take note: Long before they made their way into the workings of modern government, the democratic tenets we hold so dear were used to great effect on pirate ships. Checks and balances. Social insurance. Freedom of expression.

The pirates who roamed the seas in the late 17th and early 18th centuries developed a floating civilization that, in terms of political philosophy, was well ahead of its time. The notion of checks and balances, in which each branch of government limits the other’s power, emerged in England in the Glorious Revolution of 1688. But by the 1670s, and likely before, pirates were developing democratic charters, establishing balance of power on their ships, and developing a nascent form of worker’s compensation: A lost limb entitled one to payment from the booty, more or less depending on whether it was a right arm, a left arm, or a leg.

Aside from walking the plank analogies, what the heck does this have to do with housing?

I’m getting to that.

If you think about it, one of the arguments against anything in the form of a bailout, is that we let the free markets decide (aka “Aargh”). Good honest hard working people should not be asked to foot the bill for other’s greed. I agree.

But all the “help” done so far is explicitly presented as anything but a “bailout” which is not true. That’s because any “fix” is essentially a bailout.

In a pure sense, the “anti-bailout” sentiment is based on the idea that people took advantage of the lending system to their own personal gain at other’s expense so they should suffer their free market fate.

If people broke laws, they should be punished. But what if they didn’t and gamed the system to its full advantage because there were no regulations or significant repercussions?

My entry into blogging in 2005 was born out of frustration that people around me were gaming the system “legally” (definitely not ethically) and seemingly nothing could be done about it or no one in government was willing to or understood what the problem was. Until now.

Which brings me to my point.

Free markets don’t work if there aren’t guidelines (remember that quote from Pirates of the Caribbean?). The problem with the lending environment of the past 5 years was the lack of appropriate regulation, oversight and enforcement. There was not a level playing field and risk could be shifted off to unwitting (misinformed, naive or stupid) investors.

In other words, it was a systemic problem.

Yet a business enterprise made up of the violent and lawless was clearly problematic: piracy required common action and mutual trust. And pirates couldn’t rely on a government to set the rules. Some think that “without government, where would we be?” Leeson says. “But what pirates really show is, no, it’s just common sense. You have an incentive to try to create rules to make society get along. And that’s just as important to pirates as it is to anybody else.”

Unless all parties have skin in the game, whether it is lenders, investors, borrowers, appraisers, mortgage brokers, mortgage bankers, investment banks, government, regulators, GSEs, ratings agencies, there is no financial democracy and we will have another systemic breakdown.

In other words, we need a workable regulatory structure.

The pirates were a lot more innovative than we probably give them credit for – you do need to lose an arm or a leg if you do something wrong.

Aye…

Tags: Talk Like A Pirate Day, GSE, Bailout Nation

3 Comments

It seems a bit early to start reflecting on the lessons learned from the housing/mortgage problems we face, since, well, we still face them.

Don’t get me wrong.

It is always good to look back over your efforts and evaluate whether anything different could have been done to yield a different result. It is just that this infers closure and it is too early to summarize.

OFHEO – James Lockhart, the director spoke last week at the 44th Annual Conference on Bank Structure and Competition in Chicago (think Auto show, only less metallic paint) on the “Lessons Learned from the Mortgage Market Turmoil.”

He arrived on the scene after the party already begun and despite the criticisms levied towards both him and his agency, I actually think he did well with what powers he has to employ.

Plus, he likes charts “To set my remarks in context, I often like to start with a chart that gives some perspective…” Start with a chart and I am on your side.

Key lessons learned

• what goes up too far goes down too far. In other words, bubbles burst.
• mortgage securities are risky and that there is a long list of financial firms that have had problems with those securities, including problems related to model, market, credit, and operational risks. A key lesson from the savings and loan crisis that was ignored was not to lend long and borrow short, as structured investment vehicles (SIVs) did.
• Another lesson ignored is that in bull markets investors and financial institutions tend to misprice risk, which can result in inadequate capital when markets turn.
• A new lesson that should be learned is that putting subprime mortgages, which almost by definition need to be worked, into a “brain dead” trust makes no sense.
• Another lesson is that overreliance on sophisticated, quantitative models promotes a hubris that has frequently caused serious problems at many financial institutions

Lessons learned specific to the GSEs

• The first is about pro-cyclical behavior during the credit cycle. An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital.
• A second lesson from recent experience is the importance of capital. Capital at individual institutions not only reduces their risk of experiencing solvency and funding problems and of contributing to financial market illiquidity, but also helps them avoid the need to retrench in bad times and miss what may be very attractive opportunities in weak markets.
• Those two lessons provide compelling arguments for a third: legislation needs to be enacted soon that would reform supervision of Fannie Mae and Freddie Mac and, specifically, give a new agency authority to set capital requirements comparable to the authority the bank regulatory agencies possess.

These are important points because the GSEs dwarf other debt and the GSEs have been losing money as of late. Here’s a few charts that may be of interest from his speech:

FDIC – Sheila Bair, FDIC CHairman was speaking in Washington, DC at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another http://www.fdic.gov/news/news/speeches/chairman/spmay1608.html on the same day Lockhart was speaking in Chicago. A full court press of self-reflection. Like Lockhart, Bair has been very outspoken and I believe lucid in her depiction of the problems at hand. To her credit, she has clearly articulated the problem with the mortgage system.

Her salient points are:

• …things may get worse before they get better. As regulators, we continue to see a lot of distress out there.
• Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.
• Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.
• The slowdown we’ve seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.
• Reform is not happening fast enough
• She explains HOP loans are NOT a bailout
• The housing crisis is now a national problem that requires a national solution. It’s no longer confined to states that once had go-go real estate markets.
• The FDIC has dealt with this kind of crisis before.

Take away

Both OFHEO and FDIC seem to be saying we need to take action now and they were powerless to do anything before this situation evolved into its current form?

It makes me wonder whether any regulatory proposals will do much good. Regulators did not take action or propose safeguards while the problem was building. How can they suddenly have wisdom now? While these recommendations and insight seem prudent but isn’t it kind of late for that?

Speaking of monoliths, here’s Steve Ballmer getting egged in Hungary.

Tags: Fannie Mae, FDIC, GSE, OFHEO, Sub-Prime, Bailout Nation, Freddie Mac

Comments Off on [Premature Lecture] Agencies Go Full Court Press On Self-reflection

Ok, let me get this straight. Fannie Mae:

• lost $2.2B in Q1
• borrowed $7B and cut dividend by 30% at the end of ’07
• will borrow $6B and cut dividend further this year
• rating agencies put some of Fannie’s ratings on negative watch
• $83B cushion for $5T in debt
• OFHEO is optimistic, investors are excited?

Actually Fannie Mae’s stock dropped 5.7% yesterday so maybe it’s not love afterall.

Ok, what am I missing here? It seems to me that the GSEs can not be the housing market’s sole saviours and we risk serious damage to our financial system if housing drops sharply this year and Fannie & Freddie get taken over by the government and assume the liabilities…

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year.

More regulation is need to protect the GSEs from faltering. OFHEO lowered their capital requirements in exchange for making Fannie Mae go out and borrower $6B to help protect against further housing market declines.

“Regulators need all the tools they can get to make sure these companies don’t fail, especially since we’re talking about entities that have over $5 trillion in financial commitments and debt,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee. “Six billion dollars looks like a pretty paltry sum, and if we get into a further housing downturn, that capital can go pretty fast.”

The dilemma (although its not really a dilemma because there few other options) is whether to entrust the GSE to get the nation out of the mortgage problem that is keeping housing from stabilizing.

Increased roles for Fannie and Freddie could be just what the doctor ordered to maintain confidence and liquidity in the mortgage markets at a crucial time and stave off a far greater crisis. However, if the crisis continues to deepen, these companies could go under and possibly push the worldwide financial system into turmoil.

William Poole, a former Federal Reserve Bank president, said that Fannie and Freddie are “at the top of my list of sources of potentially serious trouble.” And according to Senator Mel Martinez, a former secretary of housing and urban development, the companies “could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”

It seems to me like this is one small solution of many others that are needed. It’s going to be a long time to ride out this downturn and common sense says that the GSEs can’t weather it alone. FHA lost money last year too. I am starting to think we are making things worse by trying to fix the problem.

Here’s a great piece by Randall Forsyth of Barrons called Show Me the Monet where he says more than half of all homeowners who bought in ’06 are underwater and that’s the tipping point for foreclosures. He wonders how the worst of the credit crisis can be behind us.

Tags: FHA, Fannie Mae, GSE, OFHEO, Freddie Mac

1 Comment

The FRB’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices showed that:

In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey.

In other words, it’s a lot harder to obtain financing.

Chairman of the Federal Reserve said in a speech yesterday that the decline in home prices was different this time and more flexibility in solving the problem is called for.

In a 10-page speech, Mr. Bernanke said (is 10 pages double spaced supposed to be significant?) that some regions of the country including California, Florida, Colorado and parts of the Midwest have experienced sharp increases in the number of homeowners who are delinquent on their mortgages, despite data that does not reveal the classic causes of foreclosures, like higher unemployment rates.

Instead, much of the problem can be attributed to a decline in home prices, which, Mr. Bernanke said, can “reduce the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.”

(image of lightbulb turning on) Borrowers were allowed to have mortgages they could not afford and speculators have less incentive to hold on to their properties. Economic vulnerability is made even more precarious by the vulnerability of the GSEs. (Today, Fannie Mae Posted unexpected losses associated with credit performance).

Bernanke’s comments on GSEs

Separately, the government-sponsored enterprises (GSEs)–Fannie Mae and Freddie Mac–could do more. Recently, the Congress expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization. In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.

As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.

Bernanke actually says “Location, Location, Location”
There is significant locational disparity in the performance of housing markets across the country. Bernanke showed a very cool set of heat maps on a variety metrics.

Tags: Fannie Mae, GSE, Ben Bernanke, Freddie Mac

6 Comments

Did a lot of painting inside my house this weekend so I apologize if some of the paint ended up on this post.

The comment period has ended but the debate rages on within the appraisal profession: the new mortgage process that does not allow appraisals to be ordered by mortgage brokers will have the effect of enabling appraisal management companies and end up with an unreliable appraisal product. Two different paths taken to the same end: crummy collateral asset quality.

I am guessing the OCC is going to get busy, gaining back the limelight on the mortgage lending process from the NY AG’s office.

James Hagarty wrote a nice piece in the Wall Street Journal called Who Should Profit From Home Appraisals? about the political storm that has only just begun. What I find disappointing is how self-serving the players have become. Nothing wrong with advocating for your constituents, that is their job. The part that rubs me wrong is that it has become so predictable. The trade groups seem to be saying the old system worked just fine. Of course that is a complete disconnect from reality.

How does one explain how we got here? And are we going in the right direction?

• Appraisal Management Companies (Title/Appraisal Vendor Management Association) – banks pay them about the same fee as the appraiser would get but they keep 30% to 60% of the fee and work hard to find appraiser (form-fillers) who will work at fees that don”t allow them to do research in the appraisal process. It’s laughable that the trade group contends they pay market rate to appraisers. Market rate for AMCs, I think is what he means. The AMC model doesn’t work paying market rates. It has been my experience that most appraisals I have seen done for AMCs are usually not worth the paper they are written on. The lower caliber appraisers they are forced to use experienced a flood of business during the housing boom. It is going to be interesting to see how that caliber of appraiser fares in a tighter underwriting environment.

The AMCs keep a big share of the fees consumers pay, typically at least 30% and sometimes more than half, appraisers and AMC executives say. The AMCs say they provide a valuable service by maintaining networks of local appraisers and controlling quality. “The AMCs pay market rate” to local appraisers, says Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, a trade group.

• Mortgage Brokers (National Association of Mortgage Brokers) – they want the appraisal industry to self-police and get rid of appraisers who turned in falsified work. Yes that has worked so well already (sarcastic emphasis). While we are at it, let’s tell mortgage brokers not to press appraisers for a higher value than they know is right or withhold payment from an appraiser for not making the number. Unbelievable. This mortgage brokerage group should be ashamed of themselves for taking the scare tactic approach that consumers will be forced to pay much higher fees. How much has the current mess already cost consumers?

• Appraisers (Appraisal Institute) – Appraisers have flip-flopped on this issue. Initially they applauded the Cuomo agreement but were disconnected from what the industry wanted. The industry has been roiling for the past month over the empowerment of AMCs. I think this trade group, which is inherently commercial appraiser centric rather than focused on the plight of residential appraisers, is so worried about AMCs that they are willing to accept the lesser evil of allowing mortgage brokers to control the appraisal (bingo!). Loss of competent appraisers versus standing up to intense pressure to play ball. Not much of a choice.

• OFHEO (HUD) – They seem to be detached from this whole situation yet they are the oversight agency for the GSEs. Amazing.

• FDIC – No comments submitted (yet they insure lenders and provide bank oversight).

• Federal Reserve – No comments submitted (yet they manage the health of the banking system).

• Congress – proposing lots of ideas but most of them of no real help or will provide a benefit after it is too late. Hard to parse out grandstanding from heartfelt concern. I’d like to think they are really trying to fix it.

• OCC (Treasury Department) – No comments submitted and boy are they pissed off. Their turf has been stepped on. Actually, it has been stomped on. I’d expect a lot more statements from the OCC in the near future.

Bottom line: If we want the lending system to have the collateral value estimate free from corruption and influence, then appraisal management companies, bank loan officers and mortgage brokers have no business whatsoever, ordering appraisals directly because they have a vested in their outcome. I believe it is called commingling interests.

Comments or no comments, I find it hard to believe that OCC will allow this to happen without making their own agreement. Otherwise, they will become as non-existent as OFHEO was during the housing boom.

Also check out: The Housing Crisis & The Plague of Potomac Fever

Tags: Appraisal Management Companies, FDIC, GSE, OFHEO, Appraisal Institute, AMC

Comments Off on [Capital Reflection] GSE/NY AG Comment Period Over, Political Maneuvering Remains

There is a whole lot of oversight going on these days. OFHEO [Office of Housing Enterprise Oversight] and others are very concerned about the ability of the GSEs to avoid getting into trouble.

I wonder why there was so little oversight before the credit crunch? Was it an…oversight (sorry)?

It’s pretty scary to think that Fannie and Freddie (and HUD) are seen as the saviors of the housing market in the creation of a jumbo conforming mortgage product, expanded portfolio size and a housing market condition that continues to weaken (default rates rise as prices decline). They are already vulnerable.

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

Fannie Mae and Freddie Mac are getting a lot more attention from the Treasury Department these days.

Treasury officials have stepped up efforts to strengthen the regulation of Fannie Mae and Freddie Mac, the two largest buyers of home mortgages, pressing key senators to break a legislative stalemate that has lasted for years.

In OFHEOs Report to Congress, it summarizes the concerns quite efficiently:

$5.0 trillion in guaranteed mortgage-backed securities outstanding and mortgage investments. Their market share of total mortgage originations grew from 37.4 percent in 2006 to 75.6 percent by the fourth quarter of 2007. There is increasing pressure for Fannie Mae and Freddie Mac to do even more to support the mortgage market, which is problematic in absence of GSE reform legislation to strengthen the regulatory process.

As evidenced by the lack of market enthusiasm for the new jumbo conforming mortgage product that was supposed to help the housing market (allowing some homeowners to refi their way out of trouble – which can’t be good for FNMA’s portfolio). And OFHEO is just wrapping up actions against former FNMA executives who manipulated earnings to enhance their bonus income.

It doesn’t seem reasonable to place all of our hopes for a solution on the GSEs.

Consider oversight in the classroom: How students see their classroom today.

Tags: Jumbo Mortgage, Conforming Mortgage, Fannie Mae, GSE, OFHEO, Bailout Nation, Freddie Mac

1 Comment